What Early Retirement Means for Your Social Security Benefits

It's tempting to retire early, but your benefits will be impacted.

Early retirees can miss out on thousands in Social Security benefits because they don't know the rules. Below are four things you should know about early retirement and Social Security.

Early retirement means you may get less

The estimates you see on your Social Security statement are based on working until that stated age. For example, if your Social Security statement says you will get $1,100 a month at age 62, that estimate assumes you work until you turn 62. The amount it says you will get at 66 or 67 assumes you work until age 66 or 67. This means if you take early retirement your benefits are likely to be less than what you see on your statement.

Social Security benefits are calculated based on your highest thirty-five years of work history, with the highest 35 determined after each year of work has been indexed for inflation. If you take early retirement and you do not have a full thirty-five years of work history, your Social Security benefits may be lower than if you work longer.

Even if you retire early, be cautious about taking Social Security at age 62 without doing an analysis first. In many cases, it is better to find other sources of funds to use in early retirement so that you delay the start of your benefits. This can help protect you from running out of money later in life.

You can retire early and still delay social security

You can take early retirement and still wait until a later age to begin your Social Security benefits. This is particularly important for married couples who want to make sure their surviving spouse gets a larger benefit once you are gone. The highest monthly benefit between the two of you is what will become the survivor benefit amount when one of you passes - at that point, you'll only get that higher benefit amount - not both amounts.

For the purpose of maximizing a future survivor benefit, you'll want the higher earner to delay the start of benefits to age 70 if possible. When married, the lower earner, however, should often start their benefits at an earlier age.

Pension benefits may go down when you are social security eligible

Some pension plans offer a larger initial monthly benefit when you take early retirement; the pension benefit then automatically goes down when you become eligible to draw on Social Security. If you are not aware of this, you may think you will get your full pension benefit plus Social Security.

Not all pensions work this way, so attend all classes or seminars offered by your employer so you fully understand your pension and health benefits prior to taking early retirement. Ask plenty of questions, and set a one-on-one appointment with a benefits advisor or HR (human resources) person if you can.

In addition, if you worked in education or for the state or a government entity, be aware when you do begin your Social Security benefits they may be less than what your statement shows due to something called the Windfall Elimination Provision and/or the Government Pension Offset. This impacted my mother, who was a teacher for 43 years. She expected to get her pension plus $1,300 a month in Social Security. She was shocked when she learned her Social Security would be less than $300 a month due to the Government Pension Offset that applies if you get a pension for years of work where you were not covered under the Social Security system.

Working during early retirement may lower your social security

If you plan on working part-time during early retirement your Social Security benefits may be reduced. The reduction is based on something called the Social Security earnings limit and it only applies if you have not yet reached full retirement age. If your income is higher than the limit, your benefits will be reduced. This reduction only applies until you reach your full retirement age, which is age 66 - 67 for most people. Once you reach full retirement age you can earn any amount and your benefits will not be reduced.